A renewed escalation in Middle East tensions has driven significant safe-haven demand for the US Dollar, resulting in declines for major currency pairs including GBP/USD, EUR/USD, and NZD/USD on Monday [1][2][3]. The immediate catalyst was Iran's suspension of message exchanges with the US, as reported by Tasnim News Agency, in protest against Israel's ongoing military operations in Lebanon against Hezbollah [1][2][3]. Additionally, Iran accused the US of violating the ceasefire after US Central Command (CENTCOM) conducted strikes on Iranian radar and drone facilities over the weekend, and Iran's Revolutionary Guard claimed to have targeted a US air base in retaliation for an attack on southern Iran [2][3].
The US Dollar Index (DXY), which measures the Greenback against a basket of six major currencies, rebounded sharply, trading at 99.27 according to [1], 99.30 according to [2], and 99.20 according to [3], after touching a two-week low near 98.75 on Friday [1][2][3]. This surge in the Dollar pressured GBP/USD to trade near 1.3445 [1], EUR/USD to around 1.1626, down nearly 0.30% on the day [3], and NZD/USD to approximately 0.5930, down 1.00% on the day [2].
The risk-off sentiment also fueled a rally in Oil prices, with West Texas Intermediate (WTI) Crude Oil rising by 6.40% according to [2] and trading above $92.50, up more than 5%, as per [3]. This has raised concerns about renewed inflationary pressures globally [2][3].
On the economic front, US data releases were generally positive. The ISM Manufacturing PMI rose to 54.0 in May from 52.7 in April, its highest level in four years according to [1], and the S&P Global US Manufacturing PMI increased to 55.1 from 54.5 [3]. In China, the RatingDog Manufacturing PMI eased to 51.8 in May from 52.2 in April but beat expectations of 51.4 [2].
Market participants are now focused on upcoming US labor market data, including the ADP Employment Change and Friday's Nonfarm Payrolls (NFP) report, which could further influence the Dollar's trajectory [1][2][3]. There is also heightened attention on central bank policy: the CME FedWatch Tool indicates a 42% probability of a 25-basis-point Federal Reserve rate hike in December [2][3], while UK traders expect nearly 42 basis points of Bank of England tightening by year-end [1], and the market is fully pricing in a European Central Bank rate hike later this month [3].
Technical analysis suggests GBP/USD maintains a modest bullish bias above key moving averages, with resistance at 1.3602 and support at 1.3447 and 1.3351 [1]. For NZD/USD, the Kiwi was the strongest against the Swiss Franc but underperformed against the US Dollar, falling 0.98% [2].
CONCLUSION
Escalating Middle East tensions have triggered a flight to safety, boosting the US Dollar and Oil prices while pressuring major currencies and raising inflation concerns. Markets are now closely watching upcoming US labor data and central bank policy signals for further direction. The overall sentiment remains risk-off, with high market impact expected in the near term.